Case Summary & Legal Holding

This judicial decision was delivered by the Sindh High Court on 2020-12-31. The matter involves proceedings between Dewan Sugar Mills Ltd and Federation of Pakistan and others, officially reported as 2024 PTD 681. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.

Full Judgment Text & Judicial Ruling

Court Name: Sindh High Court Judge(s): Adnan Iqbal Chaudhry Title: Dewan Sugar Mills Ltd vs Federation of Pakistan and others Case No.:Suit No. 850/2020 to Suit No. 852/2020, Suit No. 853/2020 to Suit No.

JUDGMENT

Reported As: 2021 SHC 1064, 2024 PTD 681, 2022 PTCL 67 Result: Suits decreed Judgment JUDGMENT Adnan Iqbal Chaudhry J. - The Plaintif fs in all of the listed suits, most of whom are sugar mills, have impugned notices issued by the Commissioner Inland Revenue, some under section 25 of the Sales Tax Act, 1990, and some both under section 25 of the Sales Tax Act and section 46 of the Federal Excise Act, 2005, informing the Plaintif fs that they have been selected for audit for various tax periods, and calling upon them to produce record and documents for the purposes of audit. The Plaintif fs have also impugned the consequent follow-up notices issued by the Additional Commissioner , Deputy Commissioner or the Assistant Commissioner Inland Revenue, listing the record and documents required of the Plaintif fs for the purposes of audit. The Plaintif fs pray that the impugned notices be declared unlawful, and that the Defendants, who are, or who regulate tax authorities, be restrained from acting upon the impugned notices. Since the cause of action of all these suits was the same, and all of them raised the same questions of law , all suits were heard together , and I proceed to decide them by this common judgment. 2. The suits listed as Set-I and Set-II, impugn notices issued only under section 25 of the Sales Tax Act, 1990. In Set-I, the impugned notices issued by the Commissioner Inland Revenue are identical to each other , having been issued by the same officer on 02-07-2020, allegedly "on the scrutiny of sales tax returns ". In Set-II, the impugned notices issued by the Commissioner Inland Revenue are similar to each other , issued on various dates in July 2020, but these do not state to have been issued on a scrutiny of sales tax returns, rather the Plaintif fs are simply

---

## Page 2

informed that they have been selected for audit in exercise of powers under section 25 of the Sales Tax Act, 1990. However , none of the impugned notices assign reasons for selecting the Plaintif fs for audit. A sample of the impugned notice issued by the Commissioner Inland Revenue in the suits of Set-I is as follows: "Dated: 02-07-2020 No. SUGAR CASES/AUDIT -25/TY -2017/ZONE-II/L TU/2020 M/s. . Sugar Mills Limited, Karachi. National T ax Number - ...... SUBJECT : AUDIT UNDER SECTION 25 OF THE SALES TAX ACT, 1990 FOR THE PERIOD FROM OCT-2015 TO SEP-2016 [T AX YEAR 2017] - INTIMA TION REGARDING. Please refer to the subject noted above. 2. On the basis of scrutiny of the sale tax returns filed by you and in exercise of powers conferred under Section 25 of the Sales Tax Act, 1990, your case is selected for audit for the tax period Oct-2015 to Sep-2016. Accordingly , you are called upon to provide all books of account and other relevant record to the Deputy Commissioner Inland Revenue, Audit Unit-04, Zone-II, LTU, Karachi, who has been directed to condu ct audit in the light of relevant provisions of the Sales T ax Act, 1990. 3. In view of above, you are requested to co-operate with the above officer to conduct the audit in a smooth and orderly manner so that the process gets completed as early as possible. However , if you face any problem during audit, you may directly contact the undersigned or the Additional Commissioner Inland Revenue, Audit Range-B, Zone-II, L TU, Karachi and we on our part will make every effort to help you out. (-sd/-) Commissioner Inland Revenue" A sample of the impugned notice issued by the Commissioner Inland Revenue in the suits of Set-II is as follows: "C.No.Jud-I/CIR/Z-II/L TU-II/2020/27 Dated: 10/07/2020 M/s..........Sugar Mills (Pvt) Limited, ................. Karachi. SUBJECT : SELECTION FOR AUDIT UNDER SECTION 25 OF THE SALES TAX ACT, 1990, FOR THE TAX PERIOD OCT OBER - 2018 T O SEPTEMBER - 2019 - INTIMA TION REGARDING Dear T axpayer , In exercise of powers conferred upon the undersigned by virtue of Section 25 of the Sales Tax Act, 1990, your case is hereby selected for audit of sales tax affairs for the period mentioned above. 2. You are therefore, called upon to submit the record maintained under the Sales Tax Act, 1990, including Books of Accounts for the subject tax periods, so that the audit of your Sales Tax affairs may be processed in accordance with law . 3. The concerned Deputy Commissioner-IR, holding jurisdiction over your case will communicate with you under the provisions of the Sales Tax Act, 1990, accordingly . You are requested to extend your cooperation with regard to submission of required information / record promptly . It is also assured and reiterated that the audit proceedings would be closed if your Sales T ax affairs are found in order . (-sd-) Commissioner Inland Revenue" 3. The suits listed as Set-III, impugn notices both under section 25 of the Sales Tax Act, 1990 and section 46 of the Federal Excise Act, 2005 issued between July 2020 and September 2020. In some cases a common notice has been issued under both provisions, and in some cases the notices are separate. In these suits, the impugned notices issued by the Commissioner Inland Revenue are similar to each other and allege to have been issued "on the scrutiny of sales tax returns ". However , these notices too do not assign reasons for selecting the Plaintif fs for audit. A sample of the impugned notice issued by the Commissioner in the suits of Set-III is as follows: "Dated: 30-07-2020 No. SUGAR CASES/AUDIT -25&46/TY -2016/AUDIT -1/LTU/2020

---

## Page 3

M/s............. .................... , Karachi. National T ax Number - ...... SUBJECT : AUDIT UNDER SECTION 25 OF THE SALES TAX ACT, 1990 AND SECTION 46 OF THE FEDERAL EXCISE ACT, 2005 FOR THE PERIOD FROM OCT-2014 TO SEP-2015 [TAX YEAR 2016] - INTIMA TION REGARDING. Please refer to the subject noted above. 2. On the basis of scrutiny of the sales tax returns filed by you and in exercise of powers conferred under section 25 of the Sales Tax Act, 1990 and section 46 of the Federal Excise Act, 2005, your case is selected for audit for the tax period Oct-2014 to Sep-2015. Accordingly , you are called upon to provide all books of account and other relevant record to the Additional Commissioner Inland Revenue, Audit Unit-E, Audit-I, LTU, Karachi, who has been directed to conduct audit in the light of relevant provisions of the Sales T ax Act, 1990. 3. In view of above, you are requested to co-operate with the above officer to conduct the audit in a smooth and orderly manner so that the process gets completed as early as possible. However , if you face any problem during audit, you may directly contact the undersigned or the Additional commissioner Inland Revenue, Audit-I, LTU, Karachi and we on our part will make every effort to help you out. (-sd-) Commissioner Inland Revenue" 4. At the hearing for settlement of issues, the suits raised issues of law only, and thus, with the consent of learned counsel on both sides, the suits were heard for final judgment in view of Order XV Rule 3 CPC. The core legal issues were settled vide order dated 23-02-2021. However , given the number of suits and the number of counsel involved, all learned counsel were permit ted to raise ancillary legal issues during the course of arguments with an opportunity to the opposing/other counsel to rebut. These ancillary legal issues, and a question to the maintainability of the suits, are recorded in the orders dated 15-10-2020 and 08-03-2021. The issues on which learned counsel made submissions were as follows: (i) Whether suits are maintainable to challenge the impugned audit notices ? (ii) Whether the impugned notices consti tute a selection for audit and not merely a call to submit record ? If so, whether that is contrary to the scheme of section 25 of the Sales Tax Act, 1990 and sections 45 and 46 of the Federal Excise Act, 2005 ? (The latter part of the issue is added under Order XIV Rule 5 CPC in view of the arguments made). (iii) Whether under section 25(2) of the Sales Tax Act, 1990, the Commissioner can select a taxpayer for the purposes of conducting audit without assigning any reasons ? (iv) Whether under section 46 of the Federal Excise Act, 2005, the Commissioner can select a taxpayer for the purposes of conducting audit without assigning any reasons ? (v) Whether the selection for audit the second time within a period of three years was prohibited under the erstwhile proviso to section 25(2) of the Sales Tax Act, 1990 ? If so, to what effect? (This issue arises in some of the suits, not all). (vi) What should the decree be ? The Sales Tax Act, 1990 is hereinafter also referred to as the 'STA'; the Federal Excise Act, 2005 as the 'FEA'; and the Commissioner Inland Revenue acting under section 25 of the Sales Tax Act, and the officer of Inland Revenue or the Commissioner acting under sections 45 and 46 of the Federal Excise Act, are hereinafter referred to as 'the Commissioner '. 5. The case of all Plaintif fs is essentially that the impugned notices calling upon the Plaintif fs to produce record and at the same time selecting them for audit, are contrary to the scheme of section 25 STA and sections 45 and 46 FEA; and that the failure to provide reasons in the impugned notices for selecting the Plaintif fs for audit is also contrary to said provisions, arbitrary , and amounts to a roving and fishing inquiry into the tax affairs of the Plaintif fs. On behalf of the Plaintif fs, arguments were lead by Mr. Sattar Pirzada Advocate, who represented the majority of

---

## Page 4

the Plaintif fs. Mr. Pirzada placed reliance primarily on the case of Indus Motor Company Ltd. v. Federati on of Pakistan (2020 PTD 297) decided by a learned single Judge of this Court whereby similar suits were decree d after holding inter alia that while calling upon a tax-payer to produce record under section 25(1) STA or under section 45(1) FEA, the Commissioner cannot simultaneously select the tax-payer for audit under the separate provisions of section 25(2) STA and section 46(1) FEA; and that, if and when a notice does issue under section 25(2) STA or under section 46(1) FEA selecting a person for audit, the Commissioner is required to assign reasons. Mr. Pirzada submitted that the notices impugned in these suits are similar to the ones impugned in the case of Indus Motor , and hence should meet the same fate. He further submitted that the impugned notices were ex facie malafide and arbitrary , having been issued mechanically on or about the same time to all sugar mills of Sindh, and at a time when all sugar mills were under probe by the Federal Government for alleged cartelization. 6. Mr. Ali Almani, learned counsel for some of the Plaintif fs, added that under section 25 STA the Commissioner does not have the power to make a random selection for audit, which power vests only with the FBR under section 72B STA. Learned counsel drew atten tion to the case of Pakistan Telecommunication Company Ltd. v. Federation of Pakistan (2016 PTD 1484 ), where a Full Bench of the Islamabad High Court had also held that while selecting a person for audit under section 25 STA and section 46 FEA, the Commissioner is required to assign reasons, albeit in doing so, the Islamabad High Court had interpreted the said provisions differently . Mr. Almani submitted that in his suits the additional ground was that the impugned audit notices had selected the Plaintif fs for audit for a second time within a period of three years, which was prohibited by the erstwhile third proviso to section 25(2) STA. In that regard, he also placed reliance on Faisalabad Electric Supply Company Ltd. v. The Federation of Pakistan (PTCL 2019 CL. 467). Learned counsel also cited Shahnawaz (Pvt.) Ltd. v. Pakistan (2011 PTD 1558 ) to submit that a tax-payer has a vested right in the statute as applicable to a particular tax year, and therefore the said proviso was attracted to the relevant tax year notwithstanding the date of selection for audit. Mr. Mohammad Fahim Bhayo, learned counsel for some of the Plaintif fs submitted that where the tax Department has proceeded to select the Plaintif fs for audit for consecutive tax years in one go, which included tax year 2018, that too was prohibited by the erstwhile third proviso to section 25(2) STA; and that the selection for audit for consecutive tax years also defeats the very purpose of self assessment. All other learned counsel representing the Plaintif fs adopted one or more of the arguments made above. 7. On behalf of the tax Department, arguments were lead by Mr. Ameer Bux Metlo Advocate. He submitted that audit was the most effective tool to asse ss the veracity of the tax return filed under the self-assessment regime; that selection for audit was not an adverse order and not actionable as held by the Supreme Court in Commissioner of Inland Revenue, Sialkot v. Allah Din Steel and Rolling Mills (2018 SCMR 1328 ); that if any order adverse to the Plaintif fs is passed after the audit, they are provided remedies under the STA and FEA respectively; that in Deputy Commissioner of Income Tax Faisalabad v. Punjab Beverage Comp any (Pvt.) Ltd.( 2007 PTD 1347 ) the Supreme Court had deprecated the tendency of by-passing the remedy provided under the tax statute; and therefore, he submitted that the suits are not maintainable. Learned counsel then submitted that the impugned notices were not arbitrary but were issued after examining the tax returns filed by the Plaintif fs; that while section 177(1) of the Income Tax Ordinance, 2001 mandates the giving of reasons while calling upon the tax-payer to submit record for audit, such stipulation does not exist in section 25 STA, and the reason was that, unlike income tax, sales tax is not out of the pocket of the tax payer . Learned counsel relied on Pfizer Pakistan Ltd. v. Deputy Commissioner (2016 PTD 1429 ) to submit that the Commissioner retains the power to select a person for audit. He submitted that selection for audit was not a separate exercise, but the calling of record under section 25(1) STA and under section 45(1) FEA implies that the person is being selected for audit; that the interpretation of section 25 STA and sections 45 and 46 FEA in the case of Indus Motor does not take into account the fact that given its volume, the scrutiny of the record after calling for its production and thereafter selecting a tax payer for audit, would practically be impossible for a Commissioner . As regards the erstwhile third proviso to section 25(2) STA under which an audit could be conducted one in three years , Mr. Metlo submitted that said proviso could not take away the power of the Commissioner to conduct audit once in a year as provided in section

---

## Page 5

25(2) itself; and that in any case, the Plaintif fs were selected for audit after the omission of the proviso by the Finance Act, 2019. Mr. Aqeel Qureshi, learned counsel for the Department added that the Explanation clause to section 25 STA makes clear that the power of the Commissioner to select a person for audit was uninhibited. Learned counsel for the tax Department submitted that since Indus Motor was by a single Bench of this Court, it was not binding on another single Bench, and urged this Bench to take an indepen dent rather different view. Other learned counsel representing the tax Department, and the Assistant Attorney General adopted the same arguments. 8. Learned counsel were heard and the relevant provisions were examined with their able assistance. The relevant provisions of section 25 of the Sales Tax Act, 1990 read as follows: "25. Access to record, documents, etc.- (1) A person who is required to maintain any record or documents under this Act or any other law shall, as and when required by Commissioner , produce record or documents which are in his possession or control or in the possession or control of his agent; and where such record or documents have been kept on electronic data, he shall allow access to the officer of Inland Revenue authorized by the Commissioner and use of any machine on which such data is kept. (2) The officer of Inland Revenue authorized by the Commissioner , on the basis of the record, obtained under subsection (1), may , once in a year , conduct audit: Provided that in case the Commissioner has information or sufficient evidence show ing that such registered person is involved in tax fraud or evasion of tax, he may authorize an officer of Inland Revenue, not below the rank of Assistant Commissioner , to conduct an inquiry or investigation under section 38: Provided further that nothing in this sub-section, shall bar the officer of Inland Reve nue from conducting audit of the records of the registered person if the same were earlier audited by the of fice of the Auditor-General of Pakistan. (2A) For the purpose of sub-section (2) of section 25, the Commissioner may conduct audit proceedings electronically through video links, or any other facility as prescribed by the Board. [inserted by Finance Act, 2020] (3) After completion of the audit under this section or any other provision of this Act, the officer of Inland Revenue may, after obtaining the registered person?s explanation on all the issues raised in the audit shall pass an order under section 1 1. (5) ...................... Explanation .- For the purpose of sections 25, 38, 38A, 38B and 45A and for removal of doubt, it is declared that the powers of the Board, Commissioner or officer of Inland Revenue under these sections are independent of the powers of the Board under section 72B and nothing contained in section 72B restricts the powers of the Board, Commissioner or officer of Inland Revenue to have access to premises, stocks, accounts, records, etc. under these sections or to conduct audit under these sections." The relevant provisions of sections 45 and 46 of the Federal Excise Act, 2005 are : "45. Access to records and posting of excise staff, etc.-- (1) A person who is required to maintain any record or documents under this Act or any other law shall, as and when required by the officer of Inland Revenue produce record or documents which are in his possession or control or in the possession or control of his agent and where such record or documents have been kept on electronic data, he shall allow access to such officer to have access and use of any machine on which such data is kept and shall facilitate such officer to retrieve whole or part of such data in such manner and to such extent as may be required by him. ............. ............. 46. Audit .-- (1) The officer of Inland Revenue authorized by the Board or the Commissioner by designation may, once in a year, after giving advance notic e in writing, conduct audit of the record s and documents of any person registered under this Act. (2) In case the Commissioner has information or sufficient evidence showing that such registered person is involved in fraud or evasion of duty, he may authorize a officer of Inland Revenue, not below the rank of Assistant Commissioner , to conduct audit at any time in a year .

---

## Page 6

(2A) After completion of the audit under this section or any other provision of law, the officer of Inland Revenue may, after obtaining the registered person?s explanation on all the issues raised in the audit shall pass an order under section 14, imposing the amount of duty as per law, charging default surcharge, imposing penalty and recovery of any amount erroneously refunded. .......... .............." Issue (i): Whether suits are maintainable to challenge the impugned audit notices ? 9. The first ground urged by learned coun sel for the tax Department as against the maintainability of the suits was that the Supreme Court had observed in Commissioner of Inland Revenue, Sialkot v. Allah Din Steel and Rolling Mills (2018 SCMR 1328 ) that a mere selection for audit is not actionable. It appears that such observation is being read by learned counsel out of context. Firstly , the case of Allah Din Steel was dealing primarily with audit selection by the FBR via a random computer ballot under section 214C of the Income Tax Ordinance, section 72B STA and section 42B FEA, which mode of audit selection by design, filters the element of pick and choose . Secondly , and more importantly , the observation that a mere selection for audit is not actionable, was made for an audit selection that was otherwise lawful, in that, it was categorically stated by the Supreme Court that a case of malafides and blatant discrimination was an exception. In the same vein it was observed that when section 177(1) of the Income Tax Ordinance, 2001 requires the Commissioner to give reasons for audit selection, that had provided the tax-payer with a safeguard. In contrast, the challenge in these suits is to an audit selection not by computer ballot, but by the Commissioner under section 25 STA and section 46 FEA, and the challenge is not to a mere selection? for audit, but to the omission of reasons while selecting for audit. Thus, in my humble view, the case of Allah Din Steel does not come in the way of these suits. 10. Though in one of the written stateme nts on behalf of the tax Department it had pleaded that the suits were barred by the ouster of jurisdiction clause in section 51(1) STA and section 41(1) FEA, that ground was not urged at the time of arguments, presumably becau se it has since been held by the Supreme Court in Searle IV Solution v. Federation of Pakistan (2018 SCMR 1444 ) that the words civil court? in such ouster clauses do not include the High Court of Sindh at Karachi exercising jurisdiction in civil suits. There is nonetheless the question of an implied bar? to jurisdiction within the meaning of section 9 CPC, arising as a consequence of special law which envisages jurisdiction by a special forum. Thus, the second objection urged against the maintainability of the suits was essentially that the suits are impliedly barred when an appeal is provided to the Plaintif fs under the STA and FEA if and when an order is passed against them under section 25(3) read with section 11 STA, and/or under section 46(2A) read with section 14 FEA, i.e., after the audit is conducted. 11. The contours of a statutory provision that expressly or impliedly bars the jurisdiction of civil courts, are by now well defined. To quote from Abbasia Cooperative Bank v . Hakeem Hafiz Muhammad Ghaus ( PLD 1997 SC 3 ): "It is a well-settled principle of interpretation that the provision contained in a statute ousting the jurisdiction of Courts of general jurisdiction is to be construed very strictly and unless the case falls within the letter and spirit of the barring provision, it should not be given effect to. It is also well-settled law that where the jurisdiction of the civil court to examine the validity of an action or an order of executive authority or a special tribunal is challenged on the ground of ouster of jurisdiction of the civil court, it must be shown (a) that the authority or the tribunal was validly constituted under the Act; (b) that the order passed or the action taken by the authority or tribunal was not mala fide; (c) that the order passed or action taken was such which could be passed or taken under the law which conferred exclusive jurisdiction on the authority or tribunal; and (d) that in passing the order or taking the action, the principles of natural justice were not violated. Unless all the conditions mentioned above are satisfied, the order or action of the authority or the tribunal would not be immune from being challenged before a civil court. As a necessary corollary , it follows that wher e the authority or the tribunal acts in violation of the provisions of the statutes which conferred jurisdiction on it or the action or order is in excess or lack of jurisdiction or mala fide or passed in violation of the principles of natural justice, such an order could be challenged before the civil court in spite of a provision in the statute barring the jurisdiction of civil court."1

---

## Page 7

Therefore, the implied bar to the jurisdiction of this Court to entertain these suits can be circumvented if the Plaintif fs demonstrate that the suits attrac t one or more of the exceptions to the ouster of jurisdiction laid down in Abbasia Cooperative Bank. Having said that, all of these suits have been pitched on the recognized exception that the impugned notices being devoid of reasons, are in violation of the provisions under which those are purportedly issued. That issue is being examined infra. If the answer to that issue is in the negative, then the suits are not maintainable, and the Plaintif fs will have to go through the mechanism provide d in the STA and/or the FEA. However , if the answer to that issue is in the…

Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.

Related Legal Research & Directories

• Browse all judgments from Sindh High Court
• Browse Pakistani court decisions from the year 2020
• Search Pakistani statutes: Constitution of Pakistan 1973, PPC, CrPC, CPC & Family Laws
• Analyze this case with Al Wakeelo AI Legal Assistant